Traders Settle Alleged Fraud for $70M

Published 7:00 pm, Tuesday, January 14, 2003

Heartland Securities Corp. and a handful of former executives and day-traders connected to Datek Online agreed to pay more than $70 million to settle allegations they manipulated trading to generate millions of dollars in illegal profits.

The former traders agreed to settle the Securities and Exchange Commission lawsuit, filed Tuesday in federal court in Manhattan, without admitting or denying the allegations.

Sheldon Maschler, 58, will pay $29.2 million, and Jeffrey Citron, 32, co-founder of Datek's online brokerage unit, will pay $22.5 million, among the largest penalties ever obtained from individuals, the SEC said. The two also agreed to be permanently barred from the brokerage industry.

Heartland, which bought Datek's day-trading business in March 1998, agreed to be censured for its role in the alleged fraud and pay $7 million.

Regulators said that Maschler and Citron, together with Michael McCarty, 39, and Erik Maschler, 32, enriched themselves illegally by manipulating the Nasdaq Stock Market's Small Order Executive System, or SOES.

The four men hatched the alleged scheme at Datek Securities in 1993 and Sheldon Maschler, Michael MCarty and Erik Maschler continued it after Heartland took over the day-trading operations, the SEC alleged. Regulators claim the fraud continued until June 2001, when the National Association of Securities Dealers banned brokers from using SOES to trade for their own accounts.

Nasdaq created the automated trading system to give small investors access to the best available prices for Nasdaq stocks.

According to the SEC, the former day-traders used the trading system to execute millions of unlawful trades for their firms, and hid the activity by falsifying records and attributing the trades to customer accounts.

Former Datek chief executive Aaron Elbogen, 54, and former chief compliance officer Moishe Zelcer, 56, aided and abetted some of the allegedly bogus record keeping, according to the SEC.

Elbogen will pay $1.4 million in penalties and Zelcer will pay $150,000 to settle the allegations, without admitting or denying them. Both were barred from the brokerage industry for at least two years and will be prohibited from managing or owning a brokerage firm.

Michael McCarty will pay $1.49 million and Erik Maschler will pay $5.9 million to settle the SEC civil suit, and have been permanently barred from the brokerage industry.

Sheldon Maschler and Michael McCarty were charged in a separate scheme involving three New York savings and loans that converted to stock ownership from mutual ownership.

Regulators allege the two men made deals with S&L depositors to obtain rights to buy shares in the initial public offerings, in violation of federal and state banking regulations, and raked in $1.7 million of illegal profits when they sold the stock.

Raft Investments Inc. and JES Management Corp., two companies owned by Sheldon Maschler, provided at least $50 million of funds used in the alleged S&L conversion scheme, the SEC said.

Maschler agreed to pay $2.3 million and McCarty will forego $69,664 of alleged ill-gotten profits, plus interest, from the S&L conversions.